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eBay: Not Out of the Woods Yet, But a Few Good Signs

October 17, 2006

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October 18, 2006

eBay: Not Out of the Woods Yet, But a Few Good Signs

Rob Hof

Quick take on eBay's third quarter: It looks like eBay's plan to recharge its core marketplace, begun earlier this year, isn't firing on all cylinders yet. Gross merchandise volume rose just 17%, to $12.6 billion--nothing to sniff at but the lowest in recent memory. Likewise, overall marketplace revenues grew only 22%, down from 35% growth a year ago. So now, eBay's marketplace growth is probably a little less than the overall rate of e-commerce growth, meaning eBay could be losing market share.

But there are a few positive signs, including a better-than-expected 10% rise in third-quarter profits. And eBay's outlook, while muted, seemed to cheer investors, who were bidding the stock up a bit in after-hours trading. For the key fourth quarter, eBay's predicting revenues will rise to between $1.62 and $1.68 billion, up 22% to 26%. Analysts are expecting about $1.67 billion.

For 2007, though, eBay sounds downright conservative at best. It predicts revenues will grow between 17% and 21% over this year, putting revenues at no more than $7.2 billion, still well short of analysts' estimates of $7.35 billion. Its estimated profit per share of at least $1.21 a share looks to be slightly shy of what analysts had been expecting. But CEO Meg Whitman told me that because eBay's business has become more seasonal, with heavy fourth-quarter sales, it has become tougher to predict the following year's results with as much certainty. In other words, eBay's playing it safe.

The takeaway: eBay's attempts to get its core marketplace, which has been slowing for some time, back on track aren't ripe yet. eBay has been trying to get sellers to put more of their eBay Stores listings onto the auction marketplace, where they tend to get sold much faster (and bring eBay higher fees). That apparently has begun--Stores inventory listings growth was 85% in the quarter, about half the rate of the last few quarters.

Problem is, non-Stores listings still grew only 20%, the lowest rate of at least the past five quarters. Until it's apparent that sellers will return to auction listings, rather than take their business to other marketplaces or their own Web sites, the jury will be out on whether eBay can revitalize what was once the Internet's most admired e-commerce venue.

Below the fold are comments from a brief interview with Meg and CFO Bob Swan...

Whitman: I would characterize this as a very good quarter for eBay. We grew revenue at 31%, EPS at 28%, very good free cash flow. I’d say we’re exactly where we expected to be. We delivered at the high end of revenue guidance and three pennies ahead on EPS. (She’s referring to the 26 cents a share non-GAAP profit.) I’d say we’re quite well-positioned going into Q4. All three of our businesses exited Q3 with some very good strength. September was a particularly good month for all three businesses, and I think we feel pretty good about where we stand.

Q: How should we look at Q4 and 2007 estimates?

Swan: Back in July, the guidance we gave for full-year ’06 was roughly $5.8 billion, earnings of 98 cents to $1.01. Today’s guidance is essentially the same revenue estimate for the year, but we’ve raised earnings guidance by two cents. That’s really the result of coming off a real strong Q3 and feeling pretty good about how things are shaping up as we going into 2007.

Q: One of the big question is whether you’ve been able to recharge the core marketplace yet. I’m not sure I see signs of that yet. Marketplace growth was only 22%, gross merchandise volume only 17%, and non-Stores inventory listings are growing less than in previous quarters.

Whitman: We didn’t expect to see much effect from the initiatives we took to rebalance the marketplace because many of them did not take place until quite close to the end of the quarter. But we have seen the Stores listing growth decline, which is actually what we desired. What we wanted to do was reduce the number of identical, not particularly competitive-priced items that were showing up in the marketplace. So the price increase actually had that desired effect. And you’re starting to see an increase in the percentage of core listings relative to the total. And you’re seeing core listings growth stabilize and obviously pick up as we head into the holiday season.

We’re also seeing some early signs of core auction conversion rate improvement, which we believe means the buyer experience is improving again. So we are cautiously optimistic that the initiatives we took in Q3 will in fact have the intended effect.

Q: Was there an expectation of a bigger impact?

Whitman: I don’t think so. We were pretty clear with investors that they shouldn’t expect to see much GMV results, though the 22% revenue growth was a little higher than they may have expected.

Shopping.com also had a strong quarter, so that contributed to the overall marketplace’s number.

Q: How has eBay Express done?

Whitman: Express is actually doing quite well. The early results in the U.S. is that it’s tracking to our internal expectations. The marketing campaign rolled out in September. GMV doubled, and we have maintained those levels post-campaign. We have an 89% satisfaction rate with buyers. And one fun fact is buyers who shopped on eBay and eBay Express spent nearly 25% more than those who have yet to shop on Express. This is good for us, because the strategic focus of eBay Express was, can we get higher share of wallet of existing eBay buyers. We recently launched eBay Express in both Germany and the U.K. The early feedback from the merchants and the buyers is good.

Q: Overall, GMV seems quite low, at just 17% growth.

Whitman: It’s about in line with what we expected given the marketplace situation that we face.

Swan: Our revenue for the marketplace in the third quarter was a little bit higher than we expected, so that was driving a lot of the favorability on earnings in the quarter. But we indicated we had some rebalancing to do, and we told the market we didn’t expect to see too much benefit until we got into the fourth quarter. While early signs are positive, we still have a bit to learn on how the rebalancing plays out.

Q: It looks like even the high end of 2007 revenue estimates are lower than analysts expect.

Swan: This is the first time we’ve really given any indication of how we see 2007 shaping up. At this time of year, our business is becoming increasingly seasonal—the fourth quarter is becoming a bigger and bigger part of our business. Secondly, the efforts around rebalancing, we’re going to learn a lot more during the course of the fourth quarter. We gave our best view at this time on how ’07 will play out.

Whitman: We are probably the only business now that gives 2007 guidance two weeks into our biggest quarter. A retailer would never give 2007 guidance two weeks into the fourth quarter. So it’s increasingly challenging. I think we eventually will have to reevaluate whether next October, we will give 2008 guidance. I think the answer to that is probably no.